Long-lived assets are business assets acquired for use over one or more years.

These
assets are not intended for resale.

Instead, they are considered “productive” assets

in the sense that they enable the business to produce the goods or services that the
business then sells to customers.

1. Tangible assets. These are long-lived assets that have physical substance, which
simply means that you can see, touch, or kick them. The most prominent examples of
tangible assets are land, buildings, machinery, vehicles, office equipment,
and furniture and fixtures. These assets are typically grouped into a single line
item on the balance sheet called Property, Plant, and Equipment . Because many
long-lived tangible assets are fixed in place, they are also known as fixed assets.

. Intangible assets. These long-lived assets have special rights but no

physical substance. The existence of most intangible assets is indicated only
by legal documents that describe their rights.

1 . Ordinary repairs and maintenance.

are expenditures for the routine maintenance and upkeep of long-lived assets.
Just like an oil change for your car, these are recurring, relatively small expenditures
that do not directly increase an asset’s usefulness.
Because these costs occur frequently to maintain the asset’s productive capacity for a
short time, they are recorded as expenses in the current period.
Because these expenses are matched to revenues, ordinary repairs and maintenance are
sometimes called revenue expenditures.

2. Extraordinary repairs, replacements, and additions. occur infrequently, involve large

expenditures, and increase an asset’s economic usefulness through enhanced efficiency,
capacity, or lifespan.
Examples include additions, major overhauls, complete reconditioning, and major replacements
and improvements, such as the complete replacement of the passenger train on a roller coaster.
Because these costs increase the usefulness of tangible assets beyond their original condition,
they are added to the appropriate long-lived asset accounts.
And because doing so means capitalizing costs, these extraordinary repairs, replacements, and
additions are called capital expenditures.
 Long-lived assets are those that a business retains for long periods of time for use in the
 Apply the cost principle to the acquisition of long-lived assets
• The acquisition cost of property, plant, and equipment is the cash-equivalent purchase
price plus all reasonable and necessary expenditures made to acquire and prepare the
asset for its intended use.
 Expenditures made after the asset is in use are either expensed or capitalized
as a cost of the asset:
a. Expenditures are expensed if they recur frequently, involve relatively small amounts,
and
do not directly lengthen the asset’s useful life. These are considered ordinary repairs and
maintenance expense.
b. Expenditures are capitalized as a cost of the asset if they provide benefits for one or
more
accounting periods beyond the current period. This category includes extraordinary
repairs, replacements, and additions.

• In conformity with the matching principle, the cost of long-lived tangible assets (less
any estimated residual value) is allocated to depreciation expense over each period
benefited by the assets.
• Because of depreciation, the book value of an asset declines over time and net income is
reduced by the amount of the expense.
• Common depreciation methods include straight-line (a constant amount over time),
units-of-production (a variable amount over time), and double-declining-balance
(a decreasing amount over time).
Explain the effect of asset impairment on the financial statements. p. 415
• When events or changes in circumstances reduce the estimated future cash flows of a
longlived asset below its book value, the book value of the asset should be written down,
with the amount of the write-down reported as an impairment loss.

 Analyze the disposal of long-lived tangible assets.

When assets are disposed of through sale or abandonment,
• Record additional depreciation arising since the last adjustment was made.
• Remove the cost of the old asset and its related accumulated depreciation.
• Recognize the cash proceeds (if any).
• Recognize any gains or losses when the asset’s book value is not equal to the
cash received.
 • Intangible assets are recorded at cost, but only when purchased.
• Intangibles are reported at book value on the balance sheet.
• Amortization is calculated for intangibles with limited useful lives, using the
straight-line method.
• Intangibles with unlimited useful lives, including goodwill, are not amortized, but
are reviewed for impairment.

 Costs that benefit future periods are capitalized as assets.

 Costs that benefit the current period are recorded as expenses.
 Declining-balance depreciation methods subtract Accumulated Depreciation, not
residualvalue, from the asset’s cost. For this reason, take extra care to ensure that
you stop depreciating the asset when its book value equals its residual value.

Frequent mistakes

 Depreciation does not represent a decline in the current value of an asset;

 declines in asset values are recorded as impairment losses, not depreciation.
 The purpose of depreciation is to allocate the cost of a long-lived asset to each
period in which the asset is used to generate revenue.
  When recording an asset disposal, remove its cost and accumulated
depreciation separately, rather than remove just its book value from the
asset’s account.+

 . The cost of intangible assets with a limited life (copyrights, patents, licensing rights, and
franchises) is spread on a straight-line basis over each period of useful life in a process
called amortization, which is similar to depreciation.
 Most companies do not estimate a residual value for their intangible assets because, unlike
tangible assets that can be sold as scrap, intangibles usually have no value at the end of their
useful lives.
 Amortization is reported as an expense each period on the income statement and also
is subtracted directly from the applicable intangible asset accounts on the
balance sheet.
 Intangibles with unlimited or indefinite lives (trademarks and goodwill) are not amortized.
 All intangible assets are tested at least annually for possible impairment, just like
long-lived tangible assets.
 If an intangible asset is impaired, its book value is written down
(reduced) to its fair value and the amount of the reduction is reported as an expense

Depreciation doesn’t involve new payments for using the asset. Rather, depreciation is the allocation of
existing costs that were already recorded as a long-lived asset.

Think of the cost of a long-lived asset as a big prepayment for future benefits. As that asset is used, those
prepaid benefits are used up, so the asset needs to be decreased each period. This decrease in the asset
creates an expense, which is reported on the income statement to match the revenues generated by the
asset.

Depreciation affects one income statement account and one balance sheet account.

The income statement account, Depreciation Expense, reports the depreciation of the current
period.

The balance sheet account, Accumulated Depreciation, contains the current period’s
depreciation as well as that of prior periods.
It is an accumulation over several periods.
Book (or carrying) value: The acquisition cost of an asset less
accumulated depreciation.
The basic idea of depreciation is to match the economic benefit that will be
used up (asset cost minus residual value) to the periods the asset will be used
to generate revenue (useful life).

Depreciable cost: The portion of the asset’s cost that will be used in generating
revenue;

Useful life: The expected service life of an asset

to the present owner.
 is an estimate of the asset’s useful economic life to the company (not its
economic life to all potential users)

SLM

1. Depreciation Expense is a constant amount each year.

2. Accumulated Depreciation increases by an equal amount each year.
3. Book Value decreases by the same equal amount each year.

 Under the units-of-production method, the depreciation expense,

accumulated depreciation, and book value vary from period to period,
depending on the number of units produced.

Declining balance depreciation method

higher amount of depreciation expense in the early years of an asset’s life
and a lower amount in later years.
Because this method speeds up depreciation reporting, it is sometimes
called an accelerated depreciation method.
 Notice that the following formula uses book value (Cost - Accumulated
Depreciation) rather than depreciable cost (Cost- Residual Value).
 residual value is not included in the formula for the declining-balance
method of computing depreciation expense, you must take extra care to ensure that
an asset’s book value is not depreciated beyond its residual value.

 Notice that the amount of depreciation expense recorded in each year of an asset’s life
depends on the method that is used.
That means that the amount of net income that is reported can vary, depending
on the depreciation method used.

 At the end of an asset’s life, after it has been fully

depreciated, the total amount of depreciation will equal the asset’s depreciable cost
regardless of the depreciation method used.

 The straight-line method is the preferred choice because it is the easiest to use and
understand, and it does a good job of matching depreciation expense to revenues
when assets are used evenly over their useful lives.

 The units-of-production method is the typical choice when asset use fluctuates
significantly from period to period.

 Declining-balance methods apply best to assets that are most productive when they
are new but quickly lose their usefulness as they get older.

 These partial-year modifications are not required in the units-of-production method

because that method is based on actual production for the period.
 Purchases of long-lived assets seldom occur on the first day of the accounting period.

Asset Impairment Losses

As a result of recording depreciation, an asset’s book value declines as it ages.
However,
 Because depreciation is not intended to report an asset at its current value,
an asset’s book value could exceed its current value, particularly if the asset
becomes impaired.
 Impairment occurs when events or changed circumstances cause the
estimated future cash flows from a long-lived asset to fall below its book
value.
  If an asset’s estimated future cash flows are less than its book value, the
book value should be written down to what the asset is worth (called fair
value) with the amount of the write-down reported as an impairment loss.
 Impairment losses are classified as an operating expense on the income
statement and reported above the Income from Operations subtotal,

Impairment: Occurs when the cash to be generated by an asset

is estimated to be less than the carrying value of that asset.

 Intangible assets are typically amortized on a straight-line basis.

 record goodwill only when there is an exchange transaction that involves the purchase of an entire
business. When an entire business is purchased, goodwill is the excess of cost over the fair value of
the net assets(assets less liabilities) acquired.
 Goodwill is not amortized because it is considered to have an indefinite life. However, it must
be written down if a company determines the value of goodwill has been permanently impaired.
 The cost of the copyright consists of the cost of acquiring and defending it
 If a company purchases the trademark or trade name, the cost is the purchase price. If the company
develops the trademark or trade name itself, the cost includes attorney’s fees, registration fees, design costs,
successful legal defense costs, and other expenditures directly related to securing it
 franchise is a contractual arrangement under which the franchisor grants the franchisee the right to sell
certain products, to provide specific services, or to use certain trademarks or trade names, usually within a
designated geographic area.
 Copyrights last for the life of the creator plus 70 years.
 The useful life of a copyright generally is significantly shorter than its legal life.

 Depreciation decreases the fixed asset’s book value and also decreases capital. Depreciation is considered
an operating expense of the business.
 It may be recorded by an entry at the end of each month or at
the end of the year, usually depending on the frequency of preparing financial statements.
 Fixed assets are recorded at cost and remain at that figure as long as they are held.
 There is one exception to the above considerations: land.
 This fixed asset is non depreciable; it is usually carried on the books permanently at
cost.
  Two accelerated methods are the double-declining balance and
the sum-of-the-years’-digits method.
 These methods provide for larger
amounts of depreciation in the earlier years. Repairs, on the other hand,
are generally lower in earlier years,


As an asset is used, accumulated depreciation increases and book value decreases.

In the final year of the assets useful life, book value is the same as scrap value.

At this point, the asset is said to be fully depreciated.

UOP; This depreciation method

accurately reflects the depreciation expense for the asset because it is
based on the number of units produced in each period.

DDB

1. Technology can make an asset obsolete or inadequate before the

asset wears out.
2. Most plant assets decline in value more quickly in their early years
than in later years.
3. Often, an asset contributes most to a business during its first years.
4. The expenditure for equipment is made at the beginning of the asset’s life.
5. It is good accounting practice to charge more depreciation in the
early years of an asset’s useful life.

It does not recognize scrap value. Instead, the book value of the asset remaining at the end of the depreciation
period becomes the scrap value.

As the book value declines, the depreciation becomes smaller.

SUM-of-the-Years’-Digits (SYD)
Like DDB, it is an accelerated method that allows more depreciation
expense to be recorded in the early years of an asset’s life and less in the
later years.

Like DDB, depreciation expense declines over the life of the

asset, but unlike DDB, it declines by the same amount each year.
  To determine depreciation expense under SYD, the asset’s cost (minus scrap value) is
multiplied by a fraction.
 The numerator of the fraction is the years remaining in the asset’s life, but in reverse
order. It changes each year.
 The denominator is the sum of all the digits making up the life
of the asset. It remains constant.

Partial-Year Depreciation
If an asset is purchased during the year rather than at the beginning, each
full year’s depreciation must be allocated between the two fiscal years affected to assure
accurate reporting and accounting.

The two fiscal years affected are the first year and the final year of depreciation.

1. If the asset is expected to generate income evenly over an extended period of time, the
straight-line method should be used.
2. If the asset will produce a different number of units each year, or
if the machine may wear out early, the units-of-production method is
preferable because it is based upon the usage rather than time.
3. If the asset is expected to generate high income in its early years,
the double-declining balance method should be used because it will generate greater
depreciation expense in its earlier years, as it can be matched
with the early period’s higher revenues. Like the sum-of-the-years’-digits, this accelerated
depreciation method reduces tax liability in the early
years, making more cash available for the asset’s purchase.

Summary
1. The market value of a fixed asset at the end of its service is known
as a scrap value
2. The uniform distribution of depreciation over the life of the asset
is known as the SLM method.
3. The SOYDM method is used to write off the asset based on a series
of fractions.
4. The method that produces the largest amount of depreciation in
the earlier years, then rapidly declines, is known as the DDBM method.
5. When income produced by an asset is the same each year, the recommended method of
depreciation is SLM_
6. When use rather than time is the key factor, __UOP is the preferred method of
depreciation.